Analysis: Midcon nat gas premiums up on demand outlook

OREANDA-NEWS. September 05, 2016. Premiums for winter natural gas at key midcontinent markets are rebounding from year-earlier levels on expectations for colder weather, higher US exports and slower production growth.

Winter premiums at Chicago, Illinois, the largest residential heating market for natural gas in the US, have surged ahead of the heating season. Following strong summer heat and a string of sluggish injections into gas storage, the market could be tighter during the upcoming winter.

Chicago Citygates premiums on 1 September for gas during November 2016 through March 2017 were at an average 20?/mmBtu premium to the Henry Hub, compared with 11?/mmBtu on 1 April, according to Argus forward curves.

Meanwhile, premiums at Mich Con Citygates, a bellwether for demand in Michigan, have more than doubled to an average of 15?/mmBtu.

Those larger premiums signal that heating needs may return to more normal levels after last winter's unusually mild weather left US gas stockpiles at record levels.

With forecasts of a more normal winter due to the La Nina weather phenomena, market participants want to have certainty for gas supply rather than be left short during peak demand, according to Gelber & Associates analyst Kent Bayazitoglu. Market participants recall the high premiums of the 2013-14 winter and would rather avoid that uncertainty, he said. Spot gas at Chicago traded as high as \\$36.44/mmBtu above the Henry Hub that winter.

The private forecaster Commodity Weather Group predicted recently that demand for heating this winter will run 24pc higher than last winter and top the five-year average by 10pc.

But high spot premiums may not materialize if actual winter weather turns out to be milder than forecast, or supply from the US northeast or Canada can mitigate high demand.

The Rockies Express (Rex) pipeline plans to add 800mn cf/d capacity on or before 1 January 2017, increasing midcontinent deliverability to 2.6 Bcf/d. About 97pc of that space is already under contract.

Gas imports from Canada rose to near summer time records in July, exceeding 8 Bcf/d because of high stockpiles in Canada and relatively lower prices than in the US. Canadian storage exceeded the five-year (2011-15) maximum in June and has remained at seasonally high levels since, the Energy Information Administration (EIA) said earlier this month.

Analysts with Barclays Commodities Research had said the cost to transport gas from Empress to Mich Con Citygates is about \\$1.04/mmBtu.

Argus forward curves show the winter strip between the NIT/AECO index in Alberta, Canada, and Mich Con Citygates have a spread of \\$1.08/mmBtu. That margin should incentivize exports from Canada.

But market participants see a tighter balance this winter as recent EIA data indicates that gas production has dropped from year-earlier levels and exports of domestic gas to Mexico in the form of LNG are growing.

A shift in structural demand related to new infrastructure projects could be compounded by a decline in US production. Gross gas output, which includes volumes that do not reach market, dropped for the fourth consecutive month to 80 Bcf/d in June.

Gas inventories, which can ease concerns about spikes in demand or supply shortfalls, may also enter the heating season below prior-year levels, providing additional support for winter prices.

It is becoming increasingly clear each week that storage will not be reaching a new record at the end of October, FirstEnergy Capital analyst Martin King said.